My husband and I spent last weekend in Lisbon. We could have gone anywhere for the weekend. Perhaps Rome, Paris or Prague. But instead, under the impression that it would have a kind of faded charm about it, we chose Lisbon.
It wasn’t quite what we expected. The city is far too faded to have any charm at all. It’s a dismal slum of collapsing buildings, filthy streets, closed shops and badly done graffiti, seemingly populated almost entirely by gangs of aggressive beggars.
Still, on the plus side central Lisbon did have one big thing going for it – it had no obviously booming property market and no British estate agents, something that made it refreshingly different from almost everywhere else in Europe, and that made us rather warm to it.
It would be nice to think that this happy state of affairs could last, that at least one European city might always be unsullied by the British obsession with property. So I was pleased to see on my return to the UK on Tuesday that Gordon Brown is doing his small bit to make sure that it remains the case.
Until Monday, investors, egged on by a fee-hungry financial services industry, had been under the impression that by April next year they’d be able to indulge their increasingly irrational passion for buy to let investing with a new justification – they would be able to call it saving for retirement.
Not any more. Brown has now decided that residential property (along with various collectibles such as wine and) will not be eligible for pension tax relief inside self invested personal pension (SIPP) wrappers after all.
The Chancellor’s change of heart is horrible news for some. Worst off are those who have already put down deposits on new-build flats that they intended to later move into their SIPPs (5,000 people in London alone apparently) but the financial services industry is pretty upset too. Its marketing departments have been pouring out furious press releases for the last five days whining about how much money they have spent preparing to help investors open SIPPs and get ready to invest them in the alternative investments that they thought were soon to be eligible. In truth, of course, it’s not the money they’ve spent already they are cross about, it’s the money they aren’t going to make in the future.
Property in self invested personal pensions was a dream come true for advisers. Just think about it. First they get to take fees off you for setting up the SIPP in the first place. Then there are all the fees associated with acquiring and managing properties. Then best of all there is the stream of income that comes in from the rent on the property. That all has to be invested too, and the industry had all manner of places in mind for it – over-priced investment bonds, incomprehensible insurance-based products, unit trusts with absurd up-front fees and the like. It was all going to be commission heaven. No wonder 68% of advisers, as surveyed by UCB Home Loans, said that they would be “promoting to their clients the ability to put residential property into a SIPP,” and no wonder they’re all so angry with Mr Brown.
Still it isn’t bad news all round. For starters Brown’s change of heart may stop more people buying new-build properties at a time when doing so is clearly a very bad idea indeed. Note that the price of new-build properties has fallen over 5% this year and that The Mortgage Works, the buy-to-let arm of The Portman Building Society, thinks buying them is so risky (“owing to the current oversupply”) that it won’t lend on them any more.
It also removes a great deal of confusion about what counts as an appropriate long-term investment for a pension. Some of the UK’s IFAs may think that wine counts as an investment for example. I do not. I think it counts as a hobby and as such should play no part whatsoever in pension planning.
Finally, to my mind at least, there is good news in the fact that the over excitement of the last few months has made people think about pensions differently – not as things completely out of their hands but as things that they can actually take control over. It has drawn attention to the existence of self invested personal pensions and encouraged lots of people who wouldn’t have otherwise done so to consider opening them.
And SIPPs really are wonderful things. If you don’t trust other people to manage your pension for you (which I most certainly don’t) they are perfect. They give you a huge amount of control over the way your retirement is financed and, while some may be disappointed at not being able to store their yachts in their pensions, SIPPs can still be used to buy a huge range of investments from fully-listed UK stocks to Aim-listed stocks (which you aren’t allowed in an Isa), foreign stocks, all manner of funds including hedge funds and of course commercial property (though that’s not something I’d do right now).
And if you must have exposure to residential property you’ll still be able to get it via the newly introduced Real Estate Investment Trusts – which are a much better way into the market for most people anyway. You still get leveraged exposure to the market (investment trusts can borrow money to invest) but you get diversification too and best of all you aren’t the one who has to worry about tenants, repairs, leases and the like. I’ve sent off my SIPP application forms and I think that everyone who doesn’t have a final salary pension (i.e. pretty much everyone who doesn’t work in the public sector) should consider doing the same.
First published in The Sunday Times, 11/12/2005